What Happens When a T-Bill Matures?

When a Treasury Bill (T-bill) reaches its maturity date, it signifies the culmination of its term as a short-term debt obligation issued by the U.S. government. T-bills are unique in that they are sold at a discount from their face value, meaning investors pay less than the amount they will receive at maturity. The difference between the discounted purchase price and the full face value repaid at the end of the term represents the interest earned by the investor.

Automatic Redemption and Payment

Upon maturity, the U.S. Treasury automatically redeems the T-bill, and the investor receives the full face value of the security. This payout includes both the initial principal invested and the accrued interest, which is the difference between the purchase price and the face value. For most investors, this process is seamless.

The default method for receiving these funds is typically a direct deposit into a linked bank account. This account would have been designated by the investor at the time of purchase or set up within their TreasuryDirect or brokerage account. This automatic payment ensures that funds become available promptly on the maturity date.

Reinvestment Options

Investors have several choices for managing their matured T-bill funds, including reinvestment. One common option is to reinvest the principal into new T-bills or other Treasury securities. This can be done either through an automated process or by manually purchasing new securities.

For investors using TreasuryDirect, auto-reinvestment can be arranged, typically directing the proceeds of a maturing T-bill to purchase a new T-bill of the same term. This election can be made when the original security is purchased or up to four business days before its maturity date.

Alternatively, investors can choose to receive the matured funds and then manually purchase new T-bills or other investments through an auction or the secondary market. This provides greater flexibility in selecting different maturities or types of securities based on current market conditions.

Taxation of T-Bill Income

The income generated from T-bills, which is the difference between the discounted purchase price and the face value received at maturity, is subject to federal income tax. Investors will generally receive a Form 1099-INT from the U.S. Treasury or their brokerage, detailing the interest earned during the tax year. The federal tax is applied at the investor’s ordinary income tax rate.

A notable advantage of T-bill income is its exemption from state and local income taxes. This can offer a tax efficiency benefit, especially for individuals residing in jurisdictions with high income tax rates.

While taxes are generally not withheld automatically on T-bill income, investors can elect to have up to 50% of their interest earnings withheld for federal taxes if they hold their securities through TreasuryDirect. Tax liability for the interest income arises in the calendar year that the T-bill matures. For example, if a T-bill purchased in December matures the following March, the income is taxable in the later year.

Managing Maturity Through Different Platforms

The experience of a T-bill maturing can vary significantly based on where the security is held, primarily differentiating between TreasuryDirect and commercial brokerage accounts.

TreasuryDirect

If no specific instructions are provided, matured T-bill funds are automatically deposited into the linked bank account on the maturity date. Within TreasuryDirect, investors can actively manage their maturing T-bills by logging into their account and navigating to the “ManageDirect” section, then “Manage My Securities.” Options exist to set up auto-reinvestment, which will use the proceeds to purchase a new T-bill of the same term. This reinvestment instruction can be edited or canceled up to four business days before the maturity date, providing flexibility.

Brokerage Accounts

When T-bills are held through a brokerage account, the maturity process is handled by the brokerage firm. Upon maturity, the face value of the T-bill is deposited into the investor’s brokerage cash management account. The investor then has the responsibility to manually re-invest these funds or transfer them out of the account.

Some brokerage firms offer an “auto-roll” feature, which aims to automate the reinvestment process similar to TreasuryDirect. However, the exact mechanics can differ, with some brokerages potentially holding funds uninvested for a short period or separating the interest component from the principal for reinvestment. Investors should consult their specific brokerage firm for detailed procedures regarding T-bill maturities and auto-roll options, as fees may also apply to these transactions.